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Mary Jones is the president of a local bank. She knows that half of the loan applicants in town she would classify as high risk and the other half as low risk. She observes that the other banks in town charge two different interest rates, a lower rate for low risk borrowers and the higher rate for high risk borrowers. She decides that to have an advantage over the other banks she will offer an average rate to everyone. The likely result will be:
A) Mary's bank will be highly successful as this will provide the bank with a large competitive advantage.
B) Mary's bank is likely to see a dramatic increase in both types of borrowers.
C) Mary's bank will experience adverse selection and have a disproportionate number of high risk borrowers.
D) Mary's bank will experience adverse selection and have a disproportionate number of low risk borrowers.
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Mary Jones is the president of a local bank. She knows that half of the loan applicants in town she...
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